A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/
The summer months tend to be pretty thin for media coverage of economics and finance. Like the rest of us, journalists take their holidays in July and August. Yet economics is no respecter of holidays and events and data have continued to pile up.
With the summer holidays drawing to an end here’s our two-minute take on what has happened in the ten weeks, since the middle of June.
The trade spat between the US and China intensified over the summer. The US imposed a 25% tariff on $50bn worth of Chinese imports and the Chinese responded in kind. Rising tensions over trade are taking a toll, fuelling capital outflows from emerging markets and weakened growth prospects. The chairman of the US Federal Reserve, Jerome Powell, has said that concerns about trade have led to US firms postponing “investment, hiring and making decisions”.
Yet protectionism seems more likely to dent, rather than derail growth. The IMF recently estimated that trade tariffs and other measures announced so far could reduce global GDP by as much as 0.5% by 2020. This is not trivial effect, but it would take only small bite out of global growth – the IMF forecasts the world economy will expand by more than 10% over this period.
Nor is support for trade dead. In July the EU and Japan signed the world’s largest bilateral free trade deal, lifting tariffs on nearly all goods traded between the two countries. Despite America’s withdrawal from the Trans-Pacific Partnership trade pact the remaining 11 signatories went ahead and ratified the agreement in July. Last week the US signed a revised trade agreement with Mexico. Talks on a deal between the US and Canada resume on Wednesday, though trade in agricultural goods remains a sticking point.
Mr Trump’s scepticism about trade does not seem to be shared by US voters. Last week a poll from the Chicago Council on Global Affairs showed that a record 85% of Americans see trade as being good for US “consumers like you”. A record 67% think trade is good for US jobs, up from 40% in 2016, and 82% rate trade as being good for the US economy. Most Americans believe the US should join the Trans-Pacific Partnership and think that the US-Canada-Mexico NAFTA trade agreement, to which Mr Trump is strongly opposed, has been “mostly good”.
Emerging market economies have had a tough summer, with US protectionism and rising US interest rates knocking sentiment and leading to outflows of capital. Emerging market currencies have suffered, with the Chinese yuan experiencing its worst month on record in June. As the primary target of US tariffs China has seen its growth prospects dim and equities have sold off, with the Chinese market down 16% since mid-June.
The damage from protectionism and rising US interest rates has been exacerbated for some emerging economies by home grown weakness, bad policy and politics. For Argentina the problem is high levels of government debt and runaway inflation. The roots of Venezuela’s misfortunes lie in two decades of socialism which has left the market economy in tatters and led to a collapse in oil output. Turkey has been hit by US sanctions designed to secure the release of an imprisoned US pastor. Meanwhile, political involvement in monetary policy has sapped market confidence and a collapsing Turkish lira has sent debt costs for the many businesses with foreign currency debt soaring. Over the summer the travails of the Turkish, Venezuelan and Argentinian economies turned into full-blown crises.
In complete contrast the US economy is sailing along, with growth at a heady 4.2% annualised rate in the second quarter, the fastest rate in almost four years. The US consumer is in good shape with confidence hitting its highest level in 18 years in August. The decision of the US Federal Reserve to raise interest rates in June, and the general expectation the Fed will hike twice more this year, testifies to the momentum of the America’s recovery.
Global equities have had a lacklustre summer, with the only real growth coming from the US where equities have risen 5% since mid-June. The US bull market is fairly narrow, with tech stocks the major outperformers. Apple and Amazon rose by 20% and 17% respectively over the summer. Chinese tech stocks, which have done well in recent years, are suffering from the slowdown in their home market. Alibaba and Tencent have fallen by around 17% since mid-June.
In the commodity markets, cuts in OPEC production have supported oil prices which are up 6% since mid-June. However, weakness in China and other emerging markets have hit prices of other commodities, especially metals. The price of zinc is down by almost a quarter since mid-June and copper hit a one-year low in August.
In the UK growth bounced back in the second quarter after a poor start the year supported by a pickup in the services and construction sectors. In a sign that it thinks growth has further to run the Bank of England raised interest rates in August.
The summer also saw the launch of ‘the Chequers plan’ – a cabinet agreement on a set of goals for the UK’s Brexit negotiations. Despite widely being seen as a blueprint for a softer Brexit, practically keeping the UK in the single market for goods, the plan would require the EU to make significant concessions, particularly on free movement of labour. This has raised the likelihood of a no-deal Brexit. Last night Michel Barnier, the EU’s chief negotiator, said that he is strongly opposed to key parts of the Chequers proposal. The odds offering by bookies Betfair imply a 48% probability of the UK leaving the EU without a deal in March 2019.
Meanwhile, opinion polls show that support for the Conservative party has edged lower following the Chequers announcement and Labour and the Tories are now running neck and neck. Brexiteers unhappy with the Chequers deal have swung to UKIP, which has seen a rise from very low levels in its support over the summer.
European economic data indicate a continued softening of growth, with manufacturing activity slowing to its lowest levels in more than a year and a half and consumer confidence dropping sharply in August. Economists downgraded this year’s GDP growth forecasts for Germany, France and Italy over the summer. European equities sold off and are now down 7% from their April peak.
Concerns over Italian banks’ exposure to the crisis in Turkey and the spending plans of a populist coalition government cobbled together in May have spooked investors. Italian equities are down 15% since early May and yields on Italian debt hit a four-year high.
So, what do the last couple of months’ news add to our understanding of the global economy?
America is moving into top gear, but it looks like an outlier. The weight of data, especially from emerging economies and the euro area, suggest that the momentum of global growth is slowing.
